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A blueprint to revive the economy

Context: Roughly 400 million workers in India who are dependent on daily wages for their survival have lost their source of livelihood because we are under a lockdown and economic activity has stopped.

Demand, supply challenges

PDS: The Central government has already announced distribution of free food, but reports suggest that there is either lack of food supplies at the local ration shop or identity requirements of ration cards are proving to be a roadblock.

Availability of labour: The new guidelines permit agricultural activity during the rabi harvest season. However, the constraint for all these commercial and agricultural activities will be the availability of labour for which re-opening of travel and transport is crucial. But it is also the riskiest.

Economic activity requires labour and capital, which are significantly diminished due to the lockdown.

Access to capital, especially working capital: A majority of the small and medium enterprises (SMEs) would have run out of cash and lost significant revenues. No bank is likely to lend to them.

Way forward

Direct Cash Transfer: The bottom half of all households (13 crore out of 26 crore families) must be given ₹5,000 per family in their bank account within a week. This will cost a maximum of ₹65,000 crore.

The government must universalise food distribution immediately, to remove identity requirements, and work with State governments to rush supplies to every ration shop so that every family gets free grain.

Opening MGNREGA sites: The April 15 guidelines allow MGNREGA work, which was stopped due to the lockdown, to be restarted while observing social distancing norms.

District collectors should be given the freedom to start and expand works under MGNREGA.

If work cannot be given for some reason, 10 days’ wages every month should be paid to the registered MGNREGA workers in the panchayat/block until the scheme is resumed.

For the formal sector, we can take a leaf out of the U.S.’s Paycheque Protection Program.

The 2017-18 Economic Survey estimated, using the Employees’ Provident Fund Organisation (EPFO) data set, that there are 40 million employees earning less than ₹15,000 per month who are employed in firms registered under the Goods and Services Tax (GST).

The government could ‘protect their pay cheques’ by funding their employers to pay them for one or two months. This can be implemented using data from the EPFO and GST databases.

Re-opening the economy gradually: Starting May 4, the new guidelines must be expanded to permit all economic activity (with a few exceptions) in non-hotspot areas.

The Central and State governments must work in tandem to identify hotspots, preferably at the level of the block/mandal and not just at the district level. This can be done with the help of public health experts and epidemiologists through strategic testing.

Mass rapid transit as well as private transport must be gradually opened in non-hotspot areas. It is necessary to open up rail and bus transport with adequate precautions such as temperature checks and social distancing norms inside buses and trains.

External trade: India must do whatever it takes through export incentives and strategic use of foreign exchange reserves to capitalise on the export opportunity arising out of this crisis and stimulate exports dramatically over the next few years.

Funding the revival

The government must step in to provide credit guarantees that can incentivise banks to SMEs.

Fiscal stimulus measures on the demand and supply side must be supplemented by monetary stimulus from the RBI with re-designed measures such as moratorium, loan forgiveness, regulatory forbearance, revised NPA regulations and easing the cycle of credit flow.

The Reserve Bank of India (RBI) has already instructed banks to issue a moratorium on loan obligations for three months. If needed, this can be extended by another three months.

The RBI, and through it the banks, should be encouraged to make capital available liberally to sectors such as tourism and manufacturing, which need specific interventions.

Finding the money

It is our estimate that the total fiscal package will cost ₹5-6 lakh crore. That amount is available. The Centre and the States have a total expenditure budget of over ₹70 lakh crore for 2020-21.

In a crisis, much of the capital expenditure may not be possible at all, and even if it is, must be deferred to the next fiscal year.

Besides, more savings can be identified by axing wasteful expenditure.

Further, the Centre can borrow money during times like this without crowding out private investment or pushing up interest rates.

As a final resort, the government can monetise part of additional deficit, otherwise known as ‘printing money’.

Monetising deficit refers to the exercise of RBI purchasing government bonds directly in the primary market and financing this debt by printing more money.

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